DOJ probing Morgan StanleyÕ relationship with New Century

NY Times: Morgan Stanley pushed New Century into riskier loans

After a year full of reaching billion-dollar settlements with some of the country’s largest banks over the toxic mortgages that led to the financial crisis, the U.S. Department of Justice reportedly has its sights set on another bank, Morgan Stanley (MS).

According to a report from the New York Times, the DOJ has begun examining the pre-crisis relationship between Morgan Stanley and New Century Financial, and Morgan Stanley’s role in “actively” influencing New Century’s risky lending practices.

According to the Times report, the DOJ is reviewing a mountain of documents provided as part of a lawsuit filed against Morgan Stanley by the American Civil Liberties Union in 2012.

In the lawsuit, the ACLU accused Morgan Stanley of encouraging New Century to write high-risk, toxic mortgages in predominately African-American neighborhoods in the run-up to the crisis.

"Hoping to realize large profits from the securitization of extremely risky mortgages, Morgan Stanley worked hand-in-glove with New Century, encouraging it to issue mortgages that ignored all of the most basic fair lending principles in order to create a large number of mortgages that could be processed and sold as securities," the ACLU said in a statement at the time.

Now, as the case is progressing, the DOJ is beginning to look into the Morgan Stanley-New Century relationship.

From the NY Times report:

The documents indicate that Morgan Stanley employees were aware of the low credit quality — and occasionally joked about it — even as they continued to snap up loans from New Century. A top due diligence executive at Morgan Stanley, Pamela Barrow, wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”

“We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”

According to the Times report, internal documents from Morgan Stanley showed that by 2005 the bank purchased half of all the loans that New Century originated since 2001, for roughly $42 billion.

Again, from the Times report:

The documents suggest that the primary way Morgan Stanley guided New Century was in contracts that spelled out the kinds of loans the bank was willing to buy in pools of mortgages. A 2006 term sheet said that the bank wanted a $1 billion pool to be at least 85 percent adjustable-rate mortgages, with at least 75 percent of the pool to include a prepayment penalty. And it dictated how many loans the bank wanted from various geographic regions.

An internal Morgan Stanley report also said that the bank got a “ ‘first and last’ look each month at any whole loan sales by New Century and in exchange Morgan Stanley provides balance sheet liquidity for New Century.”

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